Which means when you buy companies growing their payouts by 10-15% annually, you are likely to see similar stock price gains – on top of the payouts you’re pocketing.Īnd I know that dividends are hot today, but a few undervalued names remain. Plus, the share prices of your dividend growth stocks will grow at the same pace as your dividends. I recommend combining high quality municipal funds with high quality dividend growth stocks for secure yields that grow over time. While munis are great for income, you also want growth in your portfolio. But you need to act fast, because you’ll soon find it impossible to get even 5%. Still, it isn’t too late to lock in 5% yields. As a result, their NAV has grown-as has their market price: These funds also avoided Puerto Rico, thanks to their quality holdings. Additionally, the highly diversified portfolios of these funds provides an extra cushion of safety that offsets the leverage. Not only has that never happened in history, but the default rate for municipal bonds is less than 0.1% and has been so for decades. For one of these funds to see its NAV go to 0, we would have to see the vast majority of the funds in its portfolio default or be downgraded to junk. VKQ is the most levered fund at 39% leverage, while PMM is the least levered at 24%. Could that happen to one of these funds? Unless there’s some calamity like a nuclear war, probably not. The biggest fear is that over-levered portfolios will result in a margin call. Leverage scares many investors, but it shouldn’t-not in this case. This is especially true because these funds have access to leverage at very low costs (thanks to the low interest rates that seem to never go away), which the managers can use to boost their returns. These are Invesco Municipal Trust (VKQ), Invesco Quality Municipal Income Fund (IQI), Nuveen Enhanced Municipal Credit Fund (NZF), and Putnam Managed Municipal Income Fund (PMM).Ī quick look at the chart above shows that these funds remain discounted to their intrinsic value, which actually makes it easier for them to pay out their distributions. There are a few municipal bond funds yielding over 5% with discounts to their net asset value (NAV), and four of them are particularly high quality with well-covered dividends. So which actively managed bond funds should we look for now?īuilding a Discounted Municipal Bond Portfolio This is another big reason to look for actively managed funds-they provide expert analysis and access that leads to lower risk and higher payouts. For this reason, active management tends to outperform in bonds, even if active investment doesn’t work as consistently in the stock market.Īctively managed bond funds can identify high quality, high yielding municipal bonds and often bid on them before smaller retail investors even know they exist. The complex dynamics between par value, yield-to-maturity changes, the relationship between Treasury and bond market yields and the limited liquidity in bond markets mean that they are much less efficient markets than equities. While some believe in passive investing – which can have benefits in the stock market - the bond market is an entirely different animal. MUB tracks the municipal bond market and has no active management.
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